Federal Deposit
Insurance Corporation

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   [¶11,280] In the Matter of Southwest Bank, Jennings, La., Docket No. FDIC-96-52b (4-10-96)

   Bank to cease and desist from such unsafe and unsound practices as engaging in hazardous lending and lax collection practices; operating with inadequate capital in relation to the kind and quality of assets held by the bank; operating with a large volume of poor quality loans; operating with an inadequate loan valuation reserve; operating in such a manner as to produce operating losses; operating in violation of Sections 325 and 353 of the FDIC Rules and Regulations; operating contrary to FDIC policy statements; operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits; and operating with inadequate supervision by the board of directors. (This order was modified pursuant to order of the FDIC dated 8-21-96. See ¶16,112.)

   [.1] Management—Qualifications Specified
   [.2] Management—Written Policy Required
   [.3] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.4] Capital—Tier 1 Capital—Increase
   [.5] Loan Loss Reserve—Maintain Adequate Valuation
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   [.6] Loans—Risk Position—Reduce Adversely Classified Loans, Accrued Interest, and Lines of Credit
   [.7] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits
   [.8] Loans—Collections Policies—Review and Strengthen
   [.9] Loans—Consolidated Farm Services Administration—Loss Claims— Procedures for Filing
   [.10] Loans—Overdue—Monthly Reports
   [.11] Loans—Internal Review Procedure
   [.12] Loans—Concentration of Credit—Monitoring Required
   [.13] Loans—Interest—Accrual of
   [.14] Violations of Law—Eliminate or Correct
   [.15] Profit Plan—Preparation Required
   [.16] Dividends—Restricted
   [.17] Compensation—Bonuses—Restricted
   [.18] Shareholders-Disclosure—Cease and Desist Order
   [.19] Cease and Desist Order—Compliance Reports

In the Matter of

SOUTHWEST BANK
JENNINGS, LOUISIANA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-96-52b
   Southwest Bank, Jennings, Louisiana ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated March 19, 1996, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, violations of regulations, and contravention of FDIC policy, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had committed violations of regulations and contravention of policies. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED that the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Bank, cease and desist from the following unsafe or unsound banking practices, violations of regulations, and contravention of policies:
   (a) engaging in hazardous lending and lax collection practices;
   (b) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;
   (c) operating with a large volume of poor quality loans;
   (d) operating with an inadequate loan valuation reserve;
   (e) operating in such a manner as to produce operating losses;
   (f) operating in violation of sections 325 and 353 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325 and 353;
   (g) operating contrary to the FDIC's Statement of Policy on Risk Based Capital; contrary to FDIC's Statement of Policy on Duties and Responsibilities of Bank Directors and Officers; and contrary to the FFIEC Interagency Statement of Policy — Allowance for Loan and Lease Losses;
   (h) operating with management whose policies and practices are detrimental to the {{6-30-96 p.C-4179}}Bank and jeopardize the safety of its deposits; and
   (i) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. (a) During the life of this ORDER, the Bank shall have management qualified to restore a Bank to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Bank's overall lending function. The chief executive officer and the senior lending official may be the same individual.
   (b) Present management shall be assessed on its ability to:

   (i) Comply with the requirements of this ORDER;
   (ii) Improve and thereafter maintain the Bank in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy; and
   (iii) Comply with all applicable State and Federal laws, regulations, and FDIC and FFIEC policy statements.
   (c) (i) During the life of this ORDER, the Bank shall notify the Regional Director of the Memphis Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Louisiana ("Commissioner") in writing of any resignations and/or terminations of any members of its board of directors and/or any of its senior executive officer(s) within 15 days of the event.
   (ii) The Bank shall comply with section 32 of the Act, 12 U.S.C. § 1831i.

   [.2] (d) (i) To ensure both compliance with this ORDER and qualified management for the Bank, the board of directors, within 60 days from the effective date of this ORDER shall develop a written policy ("Management Policy") which shall incorporate an analysis of the Bank's management and staffing requirements and shall, at a minimum address (1) both the number and type of positions needed to properly manage the Bank, (2) a clear and concise description of the needed experience and pay for each job, (3) an evaluation of present management, (4) a plan to recruit, hire or replace personnel with requisite ability and experience, (5) a periodic evaluation of each individual's job performance, and (6) the establishment of procedures to periodically review and update the Management Policy.
   (ii) The Management Policy and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. Within 30 days from receipt of any comment, and after consideration of such comment, the board of directors shall approve the Management Policy which approval shall be recorded in the minutes of the meeting of the board of directors. Thereafter, the Bank and its directors, officers and employees shall implement and follow the Management Policy and any modifications thereto.

   (i) Who shall not be employed, in any capacity, by the Bank or its affiliates other than as a director of the Bank or an affiliate;
   (ii) Who shall not own or control more than 5 percent of the voting stock of the Bank;
   (iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than 5 percent of the Bank's equity capital and reserves;
   (iv) Who shall not be related to any {{6-30-96 p.C-4180}}directors, principal shareholders of the Bank or affiliates of the Bank; and
   (v) Who shall be a resident of, or engage in business in, the Bank's trade area.

   (i) The sale of new securities in the form of common stock; or
   (ii) Any other method acceptable to the FDIC.

   [.5] 3. (a) Within 30 days from the effective date of this Order, the Bank shall establish and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses. In determining the adequacy of the valuation reserve for loan and lease losses, the board of directors of the Bank shall at a minimum consider the following:

   (i) Prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions—Consolidated Reports of Condition and Income";
   (ii) The volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as an analysis of net charge-offs experienced on previously adversely classified loans;
   (iii) The extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans;
   (iv) The trend in loan growth, including any rapid increase in loan volume within a relatively short time period;
   (v) General and local economic conditions affecting the collectibility of the Bank's loans;
   (vi) Previous loan loss experience by loan type, including the trend of net charge-offs as a percent of average loans over the past several years;
   (vii) Off balance sheet credit risks;
   (viii) The overall risk associated with each concentration of credit together with the degree of risk associated with each related individual borrower;
   (ix) FFIEC Interagency Statement of Policy — Allowance for Loan and Lease Losses; and
   (x) Any other factors appropriate in determining future valuation reserves.

   [.6] 4. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all loans classified "Loss" as of September 30, 1995, that have not been previously collected or charged-off. Reduction of these assets through proceeds of other loans made by the Bank is not {{6-30-96 p.C-4182}}considered collection for the purpose of this paragraph.
   (b) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, $163,000 of accrued interest being carried on the Bank's books, and classified "Loss" as of September 30, 1995.
   (c) On or before April 10, 1996, the Bank shall eliminate from its books by charge-off or collection, an additional $683,000 in accrued interest classified "Loss" as of September 30, 1995.
   (d) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and the Commissioner for review and approval a written plan of action directed at lessening the Bank's risk position in each line of credit which was classified "Substandard" as of September 30, 1995, and which aggregated $50,000 or more. Such plan shall include, but not be limited to, the following:

   (i) Target dollar levels to which the Bank will reduce each line of credit within three months, six months, and twelve months from the effective date of this ORDER; and
   (iii) Provisions for the submissions of monthly written progress reports under this Paragraph 4 to the Bank's board of directors for review and recordation in the board minutes.

   [.7] 5. (a) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss" and is uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.
   (b) Beginning with the effective date of this ORDER, the Bank shall not make any further extensions of credit, directly or indirectly, to any borrower whose loans are adversely classified "Substandard" as of September 30, 1995, without prior approval by the Bank's board of directors after the board's affirmative determination, as reflected in the minutes of the meeting, that:

   (i) The extension of credit is in full compliance with the Bank's loan policy;
   (ii) that the extension of credit is necessary to protect the Bank's interest or is adequately secured;
   (iii) that credit analysis has determined the customer to be creditworthy; and
   (iv) that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title and lien documents.

   [.8] (a) Review and strengthen its collection policies and procedures;

   [.9] (b) Establish and adopt written procedures to ensure the Bank's timely filing of loss claims on all assets guaranteed by the Consolidated Farm Services Administration in which principal or interest has been in default for 90 days; and

   [.10] (c) Establish and adopt written procedures which shall provide for the submission of a monthly written report to the board of directors identifying all loans for which principal or interest is past due 90 days or more and identifying the collection action being taken on each of the identified loans. A copy of the report shall be submitted to the Regional Director within seven days of each board meeting.

   [.11] 7. (a) Within 30 days of the effective date of this ORDER, the board of directors shall establish an internal loan review and grading system ("System") to periodically review the Bank's loan portfolio and identify and categorize problem credits. At a minimum, the System shall provide for:


(i) The identification of the overall quality of the loan portfolio;
(ii) The identification and amount of each delinquent loan;
(iii) An identification or grouping of {{6-30-96 p.C-4183}}loans that warrant the special attention of management;
   (iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;
   (v) An identification of credit and collateral documentation exceptions;
   (vi) The identification and status of each violation of law, rule or regulation;
   (vii) An identification of loans not in conformance with the Bank's lending policy, and exceptions to the Bank's lending policy; and
   (viii) A mechanism for reporting periodically, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.

   (b) A copy of the reports submitted to the board, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.

   [.13] 9. Beginning with the effective date of this ORDER, the Bank shall:

   (a) Implement a written loan interest nonaccrual policy which conforms with the requirements contained in the Instructions for Preparation of Reports of Conditions and Income published by the Federal Financial Institutions Examination Council ("Call Report Instructions"); and
   (b) Place all loans guaranteed by the Consolidated Farm Services Administration, with principal or interest in default for a period of 90 days or more, on a nonaccrual status; unless, the Bank's board of directors has made an affirmative determination, as reflected in the minutes of the meeting, that the loan is both well secured and in process of collection as defined by the Call Report Instructions. A summary of all documentation reviewed by the Bank's board of directors in supporting its decision shall be attached to the minutes.
   (c) Any loan not placed in a nonaccrual status in accordance with paragraph 9(b) above, which subsequently becomes 270 days past due, shall immediately be placed in a nonaccrual status; unless, the Bank has obtained the written certification of the Consolidated Farm Services Administration that the loan is in the process of collection and the guaranty will be honored.

   [.15] 11. (a) Within 60 days from the effective date of this ORDER, and by January 15 of each calendar year thereafter, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:

   (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance;
   (ii) realistic and comprehensive budgets;
   (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections on not less than a quarterly basis; and
   (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   (b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of {{6-30-96 p.C-4184}}the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.

   [.17] 13. During the life of this ORDER, any bonuses paid which exceed 10 percent of an individual's annual salary must be adequately supported as to appropriateness. Supporting documentation is to be maintained with the minutes of the Board meeting at which the bonus was approved.

   [.18] 14. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER, (i) in conjunction with the Bank's next shareholder communication, and also (ii) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Division of Supervision, Registration and Disclosure Unit, 550 17th Street, N.W., Room F-250, Washington, D.C. 20429 for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.

   [.19] 15. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every third month thereafter, the Bank shall furnish written progress reports to the Regional Director detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Bank.
   This ORDER shall become effective 10 days from the date of its issuance.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated: April 10, 1996
   Pursuant to delegated authority.